Senator Carr told the China's Century conference in Sydney that Australia faced challenges from an increasingly democratic and nationalistic China.

But Australia had nothing to fear from Chinese investment, despite concern about the sale of the nation's largest cotton farm, Cubbie Station, to a Chinese-led consortium earlier this month.

"We should resist the temptation of falling back on narrow, nationalistic sloganeering when it comes to Chinese investment in Australia," he told the conference.

Senator Carr said direct foreign investment from China accounted for just 2.6 per cent of total overseas investment in Australia last year, well behind the United States, UK, Japan and the Netherlands.

The European Union was the source of 34 per cent of Australia's foreign investment, he said.

During a question and answer session after his speech, Senator Carr said China was becoming more transparent, pointing to a recent address from outgoing Chinese Premier Wen Jiabao that referred to democracy.